Will Wal-Mart’s Straight Talk squeeze wireless carriers?

Back to the future: Straight Talk phones like the LG 200C might be dowdy, but growth in the prepaid market could eventually squeeze carrier profits. Photo: LG.

Look out, U.S. wireless carriers: Wal-Mart is teaming up with billionaire Carlos Slim’s América Móvil to train its price-crushing might on cell phones.

In time for the holiday season, the mega-retailer on Wednesday announced a nationwide roll-out of the new prepaid Straight Talk service, offered through América Móvil subsidiary Tracfone Wireless. Unlike mainstream wireless plans that pair cutting-edge phones with higher monthly fees and multi-year contracts, pre-paid services like Straight Talk offer cheaper phones, lower fees and no contracts.

The bargain-basement prepaid approach makes sense in a down economy, where consumers are looking for cheaper options and fewer can pass the credit checks that come with traditional phone plans. Prepaid plans have been a hot ticket in this market, which explains why Wal-Mart WMT is taking Straight Talk from a year-long pilot in 234 stores to a nationwide, 3,200-store launch.

Why does this matter? It’s not just about price. The all-you-can-eat Straight Talk plan is only $5 per month cheaper than offerings from rival Boost Mobile – plus, the Straight Talk phones aren’t going to impress anyone. The cheapest, the LG 200C, costs $40. The somewhat better looking Motorola’s MOT RAZR V3A is $100. Both might have been cool four years ago, but not today.

No, the interesting thing here is the evolution – and proliferation – of prepaid.

With Wal-Mart in the game, the other pre-paid players will feel pressure to offer both lower prices and cooler phones; and with low-cost smartphone software like Android gaining steam, it’s only a matter of time before decent smartphones arrive hit the prepaid market. (Sprint S CEO Dan Hesse said as much at Fortune’s Brainstorm Tech conference in July.)

Over time, those cooler phones and no-contract plans could start to lure customers away from mainstream wireless services. That’s good for penny-pinching consumers, but bad for carrier profits.